Chapter 3 Processing Accounting Information Using Financial Accounting Information: The Alternative to Debits and Credits, 6/e by Gary A. Porter and Curtis L. Norton Copyright © 2009 Thomson South-Western, a part of Cengage Learning.

External and Internal Events External events: interaction between entity and outside environment LO1 Internal events: Event occurs entirely within the entity

Source Documents Evidence needed in an accounting system to record transactions Purchase Invoice Cash Register Tape Sales Invoice Receiving Document Payroll Records Shipping Document Checks LO2

Assets = Liabilities + Stockholders’ + Revenues - Expenses Equity Cash Capital Stock $100,000 = $ 100,000 The accounting equation must always remain in balance Issue Capital Stock for Cash LO3 1/08 Transactions for Glengarry Health Club

Purchase of Property in Exchange for Note Payable Increase on left has corresponding increase on right Land Note Payable $ 50,000 = $200,000 Building $150,000 Assets = Liabilities + Stockholders’ + Revenues - Expenses Equity

E quip. Accts. Pay. $20,000 = $20,000 Purchase of Equipment on Account At least two accounts affected by every transaction

Revenue – Expenses = Net Income or (Net Loss) Income Statement Statement of Retained Earnings Beg. R/E + Net Income OR ( – Net Loss) – Dividends = End. R/E Effect of Revenue and Expenses on Retained Earnings

Sell Monthly Memberships on Account Assets = Liabilities + Stockholders’ + Revenues - Expenses Equity Accts. Rec. $15,000 = + $15,000 Revenues increase retained earnings

Sell Court Time Cash $5,000 = + $5,000 Revenues increase retained earnings Assets = Liabilities + Stockholders’ + Revenues - Expenses Equity

Cash – $10,000 = – $10,000 Expenses decrease retained earnings Payment of Wages and Salaries Assets = Liabilities + Stockholders’ + Revenues - Expenses Equity

Cash – $3,000 = – $3,000 Payment of Utilities Expenses also decrease assets or increase liabilities Assets = Liabilities + Stockholders’ + Revenues - Expenses Equity

Collection of Accounts Receivable Assets = Liabilities + Stockholders’ + Revenues - Expenses Equity Cash + $4,000 = (no change in Liab. or R/E) Accts. Rec. – $4,000 Assets were traded: accounts receivable for cash

Assets = Liabilities + Stockholders’ + Revenues - Expenses Equity Cash Retained Earnings – $2,000 = – $2,000 Payment of Dividends Dividends directly reduce retained earnings

Assets = Liabilities + S/E Sold stock+ $100,000 = + $100,000 Bought prop. with note+ 200,000 = + $200,000 Bought equip. on acct.+ 20,000= + 20,000 Sold memberships+ 15,000= + 15,000 Sold court time+ 5,000 = + 5,000 Paid wages– 10,000 = – 10,000 Paid utilities– 3,000 = – 3,000 Collected A/R+ 4,000 = (no change in Liabilities + OE) – 4,000 Paid dividends– 2,000 = – 2,000 Cumulative Effect of Transactions for Glengarry Health Club + $325,000 = + $220,000 + $105,000

Glengarry Health Club Income Statement For the Month Ended January 31, 2008 Revenues: Memberships $15,000 Court fees 5,000 $20,000 Expenses: Salaries and wages $10,000 Utilities 3,000 13,000 Net income $ 7,000 Net increase to retained earnings

Glengarry Health Club Statement of Retained Earnings For the Month Ended January 31, 2008 Beginning balance, January 1, 2008 $ 0 ADD: Net income for January 7,000 DEDUCT: Dividends for January 2,000 Ending balance, January 31, 2008 $ 5,000

Glengarry Health Club Balance Sheet January 31, 2008 Assets Cash $ 94,000 Accts. Rec. 11,000 Equipment 20,000 Building 150,000 Land 50,000 Total assets$325,000 Liabilities and Stockholders’ Equity Accounts payable $ 20,000 Notes payable 200,000 Capital stock 100,000 Retained earnings 5,000 Total liabilities and Stockholders’ equity $325,000

Sample Chart of Accounts 100–199: ASSETS 100–109: Cash 101: Checking Account 102: Savings Account 110–119: Receivables 111: Accounts Receivable 120–129: Prepaid Assets 121: Cleaning Supplies 122: Prepaid Insurance 130–139: Property, Plant, and Equipment 131: Land 132: Building : 200–299 LIABILITIES 200–209: Short-Term Liabilities 201: Accounts Payable 202: Wages Payable : 300–399 STOCKHOLDERS’ EQUITY 301: Preferred Stock 302: Common Stock 303: Retained Earnings 400–499 REVENUES : 500–599 EXPENSES : LO4

General Ledger File or book that contains one page (or entry) for each account Cash +100 – 50 A/R +400 –100

The T Account Account Name Representation of one account in the general ledger Debits are entered on left Credits are entered on right LO5

The T Account 900 cr. Account Name 400 dr. 500 cr. Debits and credits are netted to obtain balance in account

Debits/Credits and the Accounting Equation = ASSETS Dr.Cr. + – + LIABILITIES Dr.Cr. + – STOCKHOLDERS’ EQUITY Dr.Cr. + – Opposite sides of the accounting equation are increased/decreased in an opposite way

Link Between Revenues and Retained Earnings RETAINED EARNINGS Dr. Cr. REVENUES Dr. Cr. Revenues increase retained earnings (part of owners’ equity) Both accounts are increased with credits – – + +

Link Between Expenses and Dividends and Retained Earnings RETAINED EARNINGS DR.CR. + – DR.CR. EXPENSES AND DIVIDENDS + – Retained earnings is decreased with debits Use debits to record(increase) expenses and dividends Expenses and dividends decrease retained earnings

Normal Account Balances Assets Expenses Dividends Liabilities Stockholders’ Equity Revenues Debit Credit all increased with debits all increased with credits

Cash Capital Stock (1) 100, ,000 (1) Transactions and T Accounts (1) Issue capital stock for cash

Transactions and T Accounts Land (2) 50,000 Note Payable Building 200, 000 (2) (2) 150,000 (2) Purchase property in exchange for note payable

Transactions and T Accounts Equipment Accounts Payable (3) 20,000 20,000 (3) (3) Purchase equipment on account

(4) Sell monthly memberships on account 15,000 (4) Membership Revenue Transactions and T Accounts Accounts Receivable (4) 15,000

(5) Sell court time 5,000 (5) Cash (1) 100,000 (5) 5,000 Court Fee Revenue Transactions and T Accounts T Accounts reflect current and previous postings to the account for each period

(6) Pay employees wages for the month (7) Pay utilities for the month (1) 100,000 (5) 5,000 Wage Expense (6) 10,000 Cash Transactions and T Accounts Utilities Expense (7) 3,000 10,000 (6) 3,000 (7)

(8) Collection of accounts receivable Cash (8) 4,000 (1) 100,000 (5) 5,000 10,000 (6) 3,000 (7) Accounts Receivable 4,000 (8) (4) 15,000 Transactions and T Accounts

(9) Pay dividends Cash (8) 4,000 (1) 100,000 (5) 5,000 10,000 (6) 3,000 (7) Dividends (9) 2,000 Transactions and T Accounts 2,000 (9)

Determine the Balance of the T Accounts Accounts Receivable 4,000 (8) (4) 15,000 Cash (8) 4,000 (1) 100,000 (5) 5,000 10,000 (6) 3,000 (7) 2,000 (9) 94,000 11,000

The Journal: Chronological Record of Transactions  Book of Original Entry  Transactions recorded in the journal first and then posted to the ledger LO6

Posting from Journal Journal (via journal entries): Dr. Cr. Cash 100,000 Capital Stock 100,000 To record the issuance of 10,000 shares Journal (via journal entries): Dr. Cr. Cash 100,000 Capital Stock 100,000 To record the issuance of 10,000 shares Transactions are entered in: Ledger Accounts Cash Capital Stock Ledger Accounts Cash Capital Stock And then posted to:

Cash Accounts Receivable Equipment Building Land Accounts Payable Notes Payable Capital Stock Membership Revenue Court Fee Revenue Wage Expense Utility Expense Dividends Totals $ 94,000 11,000 20, ,000 50,000 $ 20, , ,000 15,000 5,000 10,000 3,000 2,000 $340,000 $340,000 Debits Credits Glengarry Health Club Trial Balance January 31, 2008 LO7

End of Chapter 3